In the US, law firms and corporate legal departments frequently use commercial legal finance.
Third-party funding and litigation finance are other names for commercial legal financing. The litigation finance USA concept is straightforward: to fund commercial litigation and arbitration.
Funding in the US has no bearing on control, which remains with the claimant. Unlike debt, capital is frequently non-recourse.
How Does Litigation Financing Work?
Litigation finance in the United States involves using a legal claim as collateral to get funding from an external party. This party, known as the funder, provides financial support to the claimant in return for a stake in the case’s outcome.
Typically, this financing is provided in such a way that the lander will not receive anything other than the collateral. It means the funder only receives a return if the case is settled or results in a judgment collection. In the event of an unsuccessful case, the claimant is not obligated to repay the funder.
Litigation Financing Categories
The third-party litigation funding has two primary categories: “consumer” and “commercial.” These categories differ significantly in their nature and scope.
Commercial Litigation Financing
In most cases, commercial litigation finance in the US is a non-recourse in any major legal dispute. Additionally, money from founders of litigation may be employed to assist or enforce a range of legal actions. These actions include contract disputes, business legal disputes, international arbitration cases, and more.
These agreements involve knowledgeable claimants whom attorneys represent. They also have previous expertise with arbitration or litigation.
Within litigation financing, there are several distinct financial arrangements:
- Single-Case Financing. This type of litigation financing is intended to help a single court action or engagement. It provides funding for legal costs. Importantly, the return of these monies depends on the case’s outcome. It’s either the one that claims or the one that funds the loan can agree on a suitable non-recourse return structure.
- Portfolio Financing. It’s designed to offer financial support for multiple legal battles or arbitrations, whether for a company or a legal firm. In the context of a law firm’s portfolio, the funder’s investment and returns are sourced from the fees. This is collected by the firm from one or more cases within the portfolio. Portfolio funding can also be applied to financing cases of the defense side.
- Multi-Party Financing. This type of funding is available primarily in non-US jurisdictions. It is commonly referred to as litigation, which monetarily aims for class options or group claims. Multi-party involves providing financial support for legal actions against the defending party in the case. Multi-party financing is more prevalent in regions like European jurisdictions and even in Australia.
Consumer Litigation Financing
Just like commercial funding, it is a non-recourse monetary advance. This is given to those pursuing personal injury claims and other related legal proceedings. In most cases, the risk capital is reimbursed together with litigation costs. But only if the plaintiff is successful in getting money from their legal claims.
Individual claimants who are generally served by consumer finance are those who have no prior legal training. Also, those are frequently not represented by counsel throughout the funding process.
What Can You Hope From Funder Of The Litigation
When seeking litigation finance, here’s what you can expect in the process:
1. Term Sheet
If mutual interest exists, the funder may propose a term sheet outlining the potential financial terms of the investment. The nature of the term sheet can differ among litigation funding firms.
2. Portfolio Analysis
The collection of the primary information and documentation, the litigation funding firm makes an analysis.
The primary goal is to determine if the case aligns with the criteria of funders’ finances. You can also involve a high-level review of the merits of the case. The depth of this analysis can vary based on the funder of the loan amount, the case’s complexity, and the parties.
3. Non-Disclosure Agreement (NDA)
The process typically starts with the signing of a non-disclosure agreement (NDA). It’s where you protect confidentiality. This is also where to facilitate the exchange of information among the claimant, lawyers, and the funder. An NDA allows the funder to thoroughly assess the merits of the legal dispute.
4. Due Diligence
Reputable funders do extensive due diligence into the opportunity of investment, delving into the :
- Claims Merit.
- Potential Damages.
- Settlement Prospects.
- Capital Required For The Case.
- Claimant’s Background.
- Financial Position.
- Capabilities Of The Legal Team Handling The Case.
The due diligence process depends on the firms. This may also involve in-house investment teams or outside counsel and advisors.
5. Funding Decision
The timeline for the period of diligence differs but typically takes weeks to complete.
Often determines whether to invest or not based on a presentation by the proposing team. If the cases’ merits stand in support of the recommendation, the funder proceeds with the investment. This provides the funding agreement of the litigation (LFA) for review.
Currently, the federal government, arbitration, and most American states allow litigation financing.
The majority of transactions involving commercial litigation finance are for corporate plaintiff lawsuits. Traditional loans are not offered by the majority of commercial lawsuit finance providers. Instead, solutions are designed as non-recourse investments.